Yesterday as I was searching the sites about patent brokers and continuing to work on one of the business plans that came from an idea two years ago, (and after interacting with an Atlanta business incubator program by phone and email – who simply requested that I get the plans made up to let them see what they would be) – I found some ideas about business that were disturbing and added to my experiences with designing new things from the course of my life.

So, this is to explain why I am stumbling about with some of the things I’ve found about business, about brokers, about investors, about angel investors and about starting a business of any kind (and about selling patents or copyrights.)

One thing that I found yesterday was from an answer to a post when I put in the search terms, patent brokers, on a google search. There were three answers to the post about getting a patent broker. I clicked over to each of the links to explore the companies’ websites which I did the same way that I always do when I’m researching something. On the first site I was exploring, there was a link to a library of resources which yielded a three page pdf written by their vice presidents of marketing / brokering patents. It was very interesting and I saved it, then hand-typed everything from it on a document.

And, I had been reading through the other pages of their site after I found it – because, of course, I read the document having clicked on the link for it first when I first arrived at their website.

Now, to be honest – I wasn’t confused but rather I couldn’t mesh the disparity between the two avenues of thought – one which I’ve learned and followed from books and resources about starting a business and the other avenue which comes from the side of investors, bankers, other active business practices in the real world that I’ve been seeing (which I’ll cover in a minute).

Okay – so just talking and thinking out loud here, (so to speak) –

When a person wants to start a business there is a path of design, invention, innovation and business concept creation which begins with the needs of people, the needs of businesses, the needs of communities and the needs generally found currently that have not been filled otherwise or are being filled in a less than optimum manner.

Then, from that point, the process of creating possible solutions, products, systems, strategies and business concepts unfolds. With every step there is a building, creating and innovating process that is underway which ultimately will yield the new tangible businesses, services, inventions, creative strategies and products that will be in the marketplace to make a better future for everyone.

Okay – I get all that.

Then, whenever I’ve looked in business books about starting your own business, the next part of the process unfolds with its written elements that define the project and the business plan, designs and background research takes shape that backs up the novelty and the invention or innovation, the logos and written marketing materials are made and access to investors or seed funding located. Then – what is disparate about all that?

I will add this too – (which came from an earlier post that I wrote in 2008) –

So, what is the disparity that has me unable to find congruency about business and aspects about business?

It is these facts – (that definitely exist in the business world community of investors, bankers and business strategies.) –

The pdf that I mentioned above about patent brokers describes the reasons that someone interested in buying a patent would have for buying it – these include but are not limited to – (from their list at IntellEdge patent brokers) –

To quote their document –

Define the buyer, define the buyer’s motivations, and you can calculate a value. The tricky part is that patents are complex assets and their uses can vary from one buyer to the next.

Some of the motivations for purchasing or owning a patent include:

General assertion purposes
Portfolio building
Keeping the patent out of the hands of NPE’s
Developing a licensing program
Supporting a litigation against another party
Avoiding litigation
To protect a new business venture
And so on . . .

Each of these motivations carries with it a somewhat different idea of the value of the patent. As an example, a patent obtained for portfolio building purposes may only be valued at around the cost of prosecution ($30K – $50K range). However, the same patent obtained to support a litigation against another party could save the buyer hundreds of thousands to millions in damages and attorney fees (and thus it would have a value in that range.)

And from the things I had researched three days ago concerning angel investors and interacting with them –

Not only do they not sign non-disclosure agreements – and in fact, neither do large companies for almost the same reasons which are that they don’t want to and have no intention of being called into court over possible infringements arising from them, but also this about angel investors and probably venture capital funds as well –

I had actually said it wrong on the earlier post from two days ago and I will correct it here –

Angel investors want a return 3 – 5 times from their investment capital into a business venture within 2 – 3 years. That means, they want to put in a $1 million dollar investment, for instance and then receive a return of 300% – 500% with 2 – 3 years back from the business. (my paraphrasing from information found in the resources about angel investors found online and elsewhere – current information from within the last three years & five years.)

That being the case, I thought about it and I thought about how the information that I’ve studied from the recent and current economic meltdown in the United States shed a light on current business practices and investor communities’ business strategies and put the two together to realize there are probably three ways basically that an investor can be assured to get that kind of return from a small or medium-sized business startup where they are investing funds.

This is my list and it is only an educated guess but it is probably about right –

B.) % shares or investment ownership value of business has increased enough to sell it for 3 – 5 x’s the investment

C.) leveraged uses of the investment are made – using it for leveraged buyouts of something else or as collateral for bonds and loans to support their ongoing business and portfolio assets (some of which could yield business liabilities for the business startup rather than for the investor using their collateral in the business as leverage – as evidence by recent events in the economy and business / financial community)

Okay, I can see that from their point of view. And of course, not to be undersold but two other secondary pathways would obviously be available to them which are – that the business where they’ve invested is wildly successful within a two year window which yields back their investment plus a 500% return to them on top of it (without tearing the business resources to hell).

Or, secondly, that they have managed to invest in a business that has an exit strategy to be sold in the marketplace within a two – three year window for a massively excessive amount of money to some other concern or investors or conglomerate. And, then the till is divided up from the sale – giving the angel investors their desired financial increases in the measures they are demanding, and maybe more than originally anticipated, although within a short window of time that is usually the least likely scenario of all.

Most businesses are not at the break-even point until three – five years from their date of inception as a startup, according to statistics and business journals. And, during this economic downturn in the US economy and throughout many of the world’s economies as well as in the vast number of sectors that have been stressed or growth-inversed by it, the break-even and profitability window for the majority of businesses, especially startups right out of the gate could be even longer than that.

– cricketdiane

***

I remember the leveraged buyouts and junk bonds of the 1980’s with their corporate raiders coming into established and partially established businesses to strip all the assets, patents, intellectual property, facilities, copyrights and other trade secrets, business processes, customer databases, supply lines and supplier agreements, market access and market distribution points, technical know-how, capital equipment, pension funds, employee health funds and every other healthy thing from the companies they raided.

And, I remember the dotcom excitement, building, buildup, bubble of startups and seed capital everywhere for the least excuse of an idea with a multitude of very healthy companies becoming quickly undermined and sorted through the bankruptcy courts when the competition for revenues and funding failed before they had a good chance to stabilize and grow. That probably means more about the investors and investment capital pulling out and taking their prize money out of the sector more than anything else. And, they did it almost simultaneously, either because they (investors and investment capital) all started into it at about the same time and the three year window to get their payouts came within a short time of one another or because there was some indication by an analyst or financial ratings group or business / financial industry consulting think tank / analysis bunch that decided it was time to do so and downgraded the potential in that sector for getting out with any money (or something in that neighborhood.)

I also found yesterday (well, actually the night before after writing the initial parts of the business plan for one of my projects), the link to something else I actually did know and had not added into the starting your own business thinking. And it was found here:

KCET’s Day says ACE-Net is working to improve its shortcomings: Because it’s an SBA project, it does have more bureaucracy than if it was done by a private company. But they are doing as much as they can to make it a streamlined process. Still, raising money is almost always a time-consuming, diabolically detailed job. Many entrepreneurs may find ACE-Net’s red tape too nettlesome. But as most soon find out, angels with real money rarely go into a relationship blind.

The danger is that ACE-Net could become a bland bulletin board, full of four-page business plans, none of which are sophisticated enough to catch an investor’s attention. To guard against that, Bibbens encourages any company using the short form to attach a complete business plan to the electronic documents. That’s especially so because entrepreneurs may want other people’s money, but they are extremely wary of revealing too much about their businesses. That’s not misplaced, says Alexander Glass, director of the Bay Area Regional Technology Alliance in Fremont, Calif. There’s an art of disclosure: Assume your principal competitor has signed on to ACE-Net as an investor, and act accordingly.

a Statement of Comprehensive Income that begins with profit or loss (bottom line of the income statement) and displays the items of other comprehensive income for the reporting period. (IAS1.81)

All non-owner changes in equity (i.e. comprehensive income ) shall be presented in either in the statement of comprehensive income (or in a separate income statement and a statement of comprehensive income). Components of comprehensive income may not be presented in the statement of changes in equity.Comprehensive income for a period includes profit or loss (net income) for that period and other comprehensive income recognised in that period.
All items of income and expense recognised in a period must be included in profit or loss unless a Standard or an Interpretation requires otherwise. (IAS 1.88) Some IFRSs require or permit that some components to be excluded from profit or loss and instead to be included in other comprehensive income. (IAS 1.89)

A single amount comprising the total of (1) the post-tax profit or loss of discontinued operations and (2) the post-tax gain or loss recognised on the disposal of the assets or disposal group(s) constituting the discontinued operation

Under the revised IAS 1, all non-owner changes in equity (comprehensive income) must be presented either in one Statement of comprehensive income or in two statements (a separate income statement and a statement of comprehensive income).

Reclassification to profit or loss (P&L)

Flows presented initially in OCI sometimes are reclassified into Earnings (Profit or Loss) when certain conditions are met. For the five types of OCI described above, the triggers for reclassification are presented in the accounting standard that gives rise to the OCI flow.

Alterations to definition of OCI

In the United States further alterations to this OCI definition occur when a new standard (including a revision of a previously issued accounting standard) identifies an item that can be measured, should be measured in the financial statements, represents a “flow” variable rather than a stock, or snapshot, variable, and does not represent a flow variable that should be presented in the Income Statement as a component of Earnings. The flow variable that is both measurable and should be recognized is then added to the list above of items that a reporting entity would include in AOCI.

In the third quarter of 2008 the United States Securities and Exchange Commission received several proposals to allow the recognition in AOCI of certain fair value changes on financial instruments. This proposal was initially well received by representatives of the banking community who felt that Earnings recognition of these fair value changes during the concurrent “credit meltdown of 2008″ would be inappropriate. The effect of this proposal, on balance, would be to remove sizeable losses from Earnings and thus Retained Earnings of banks, and assist them in preserving their regulatory capital. The regulatory capital of banks in the US and generally worldwide includes contributed equity capital and retained earnings but excludes AOCI, even though it is reported as a component of the Equity section of the Balance Sheet.

Note that beyond the disparity which says the business startup owner is involved in the passion of building a business and place in the market that essentially is nothing more than a sandcastle for the investment community to tear down in order to take their own profits and returns within a very short window of time (2-3 years), the other part of the disparity was made extremely obvious during the current economic crisis which is that businesses have become hedge funds for themselves and commonly maneuver stocks and investment portfolios to show a profit stream even when there isn’t one in the marketplace for their business products or even for their business model in general. That practice not only has led to extreme maneuvers in business strategies but also the taking of losses for the tax incentives gleaned from them to cover the portfolio losses when they occur and transfer them into the business to cover assets and vice versa.

Very seldom in the history of economies and business has there been a time in which the validity and viability of a business did not rest on the revenues derived from the basic foundation and “business model” or the profits and losses balanced over time to profitability based upon income derived from these activities. That is to say also, when businesses in a competitive market arena do not rely upon the revenues of their primary business activities but rather on the portfolio of non———- stocks, bonds, credit derivatives and other financial “tools” where their activities do not play a part, the primary business model cannot flex to meet the real market environment and the real challenges inherently present at any given time. The loop of feedback and response to the marketplace and to customers and to future revenues and revenue stream potentials from the real business activities is curtailed, circumvented and its immediacy is interrupted.

What these things tell me is that competitive industries in the marketplace would not be playing by the same rules as any startup business would be necessarily required to use – no investment portfolio would exist to hedge against slow sales in a startup business unless it was designed that way from the very outset, but nearly all businesses competing in the marketplace for that same share of the market would have those portfolios and offset strategies for everything from slow sales, to receiving tax breaks from it as a business method, to using it for excess and immediate leverage for expansion and general business loans and access to commercial paper which wouldn’t be available to the startup in any measure.

What is also telling about the disparity between the way that business investors, patent brokers, bankers, and investment resources look at a business, especially a startup in comparison to the person that is inventing that business in the first place, building it and investing personal capital, resources, dreams, sweat equity, creativity and innovation in it – is the idea that comes from the “business world” which devalues concepts, ideas, innovations and market distinction at the same time it is desperately hungry for it (as mentioned in every single published opportunity for discourse by the business. banking and investment communities.)

– cricketdiane

***

So, I was making the business plan and accompanying materials to go with it about the time I found the patent brokers pdf that explained why my patents would basically never be worth anything to anybody and I would be lucky to get them sold by a broker who could find someone to buy them just to put them on a shelf and keep them from the competition – or at least that’s about the way I took it at the time point in creating the business plan that I was working to do. And, although I can understand their perspective about it – they are likely operating (and just as other patent brokers as well are operating) more in the interests of the buyers and investors in the business community who want to buy patents for their portfolios or to keep them out of the marketplace than are they operating in the interests of the patent holders, inventors, designers and companies or research organizations holding those patents.

There are probably a lot of good reasons for that – up to and including the fact that patent holders and inventors are tourists that only show up occasionally compared to the everyday bread and butter money that brokers of patents and other financial investment resources get on an ongoing basis from businesses and corporations that raid for patents.

And, then I was trying to resolve the disparity of these business viewpoints and avenues of practical business paradigms – even while creating a business plan and I kept thinking, who would create a patentable thing of any kind just for some business to buy and keep it out of the marketplace?

***

My Note – (cont.)

Okay, so here is where I am with this now –

I feel completely clueless about how to properly proceed in this environment given these chasms between what I am reading and applying about starting a business compared to the avenues of thought used by investors and other business resources and players already in the marketplace.

And, secondly – having already in my lifetime (across many other years previous to this one) – run around to various business investors, potential business partners and community members looking for investment dollars for previous business plans and revenue generating patentable materials, copyrights and businesses – I am disinclined to do that ever again – ever.

It did not yield any of the results I expected nor those that I wanted from the theft of opportunities away from me to the consummate rejection of me and my businesses, inventions and copyrighted designs – only to find them being used in the marketplace by others at some later time not long after showing them to potential business partners and investors. I don’t want to ever do that again because it is horribly wasteful in time, resources, goodwill, efforts and yields nothing of any good to my life.

And thirdly, recognizing that I am never going to be a good credit risk – a good candidate risk for investors since I have neither fourteen degrees after my name nor a track record for my business abilities nor credible business experience obvious by some fancy resume or work history (among other things) – how to go about this?

Yesterday, I tried to do something with the idea of a twenty-four hour video and discovered how much I don’t know about making video. I did broadcast a bit of it on the livestream channel but mostly that ended up being photos of flowers that I had taken. While I was doing it mucking about in my computer, I discovered a document made earlier this year with some information from 2007 about the CERCLA inventory of toxic substances which I want to post here with a couple other things I found online.

To be perfectly honest about making a twenty four hour video as was suggested in a CNN story about a film maker wanting to use them from around the world to make a documentary, I have to say that for me, it was more complicated than it looks. I don’t think I did end up with even three hours of video maybe. Between webcams and two simple digital cameras I have which take some measure of video, I discovered problems with sound, problems with downloading, problems with computers I didn’t realize existed, problems with interacting between computers and webcams and videos and online downloading places – and thoroughly became confused and frustrated with my lack of proficiency.

With a tripod set up in one spot, I thought that painting a thing or two might be possible and that never got done for fussing with the computer and the cameras – and then when I finally decided to simply go live with the webcams on my channel at livestream – it turns out that the webcams I have aren’t capable of capturing something like that with what I know about it. So, I will have to try again sometime.

Before this exercise in insanity, I had been researching angel investors, venture capital and a number of other business things, resources, etc. and posting them. I didn’t post everything that I had found before getting into the other project to see what it would be like to do it. The remaining info on the angel investors included several articles that described the fact that they are very unlikely to sign non-disclosure agreements. Well, durn. I can understand why they won’t, but it really made me think about what can be shown to them and what has to be left out of anything they see for the sake of protecting some designs, inventions and trade secrets which would be used for a company or business. It was very disheartening since I had gone to the trouble to find non-disclosure forms on the WIPO site.

If it is just a matter of making widgets, that’s one thing. But where proprietary knowledge, software, inventions without their provisional patent protection or application made yet, designs and business methods that could quickly give a foothold to competitive businesses before even launching my own – that is something else again. There seems to be either no protection in seeking financial backing or a way to do it that I need to understand better. Most of the venture capitalists funds are for businesses well under way and many of the angel investor groups’ funds are for businesses that at the very least, have been established in some measure already. And, none of them are going to be involved without a fair understanding of what the business is and how it means to go about it. As much as it doesn’t have to be comprehensive for them to make a judgment about their involvement, plans and presentations made to them would necessarily have to incorporate some of the privately held marketable and market distinction types of trade secrets to be used.

I don’t get it. And apparently most investors are investing in the person rather than in the business or the portents of success for that business. So, there is that. It is also a measure of how they been taken for a ride by those who, in every respect – looked right, talked right, said the right things and drove the right car with the right business connections to make themselves appear to be viable when they were not – like Bernie Madoff and many others have done. It is almost as though these people who were up to getting the money without intending to give a reasonable and fair return from it, were able to work from the back of the process forward to simply give the investors what they wanted to hear, wanted to see and wanted to believe. How can I possibly compete with that on those terms when people doing it that way already have a foothold and I do not?

And, worst of all – that works. What else does? But, I’m going to go forward from here and see what I can do. The other information about angel investors that I did find the other day is posted here and then I will make a separate post about the CERCLA list and the roadway pollutant dissolving pavement that I found on Gizmag (which is very nifty, but only one of several products around that do this – I might get the others from my documents and put them on as well.)

I don’t know whether to do a bit more of the video stuff or not – it is very frustrating, and I am going to be putting together all the pieces for some business presentations to send along to one of the business incubator teams that I found in Atlanta. I don’t know how much good it will do, but at least I did find a nice format for the packages over on the site for ATDC at Georgia Tech. I will have to change it a little because of the software I’m using – but it is clean and nifty with a nice overview format to present business plans to investors and other business resources.

So, I’m going to work on that over the next few days or however long it takes to find all the elements in my files online and physical files of printouts. However, most of it is in my head and the other parts will be added to back up specific parts like explanations of need for the product or service in the marketplace and competitive patents and services already available in the market with what happened to them.

– cricketdiane

****

Here are some of the angel investor and venture capital resources I found –

Formal valuation of the seller’s business is a vital component of the buyer’s analysis when discussing a proposed acquisition. The valuation of a business in the context of an acquisition, as opposed to estate planning or other purposes, often involves consideration of investment or strategic value beyond a street analysis of fair market value. Valuation may be done by the seller prior to entertaining prospective buyers, by the buyer who identifies a specific target or by both parties during negotiations to resolve a dispute over price.

(etc.)

Determining Strategic Value

In the context of a proposed acquisition, a veteran appraiser will create a strategic model of a proforma, showing what the seller’s business would look like under the umbrella of the prospective buyer’s company. The first step is to normalize current operating results to establish net free cash flow. Next, the appraiser examines several what-if scenarios to determine how specific line items would change under various circumstances. This exercise allows the appraiser to identify a range of strategic values based on the projected earnings stream of the seller’s company under its proposed new ownership. The higher this earnings stream, the higher the purchase price.

To arrive at this strategic value, the appraiser obtains a great deal of financial data and general information on many aspects of the seller’s business, such as the quality of management or the company’s reputation in the marketplace. The appraiser must be alert throughout this process in order to capture bits of information that will be useful in the final determination of the company’s strategic value. In addition, other elements are considered that may not be apparent without further probing. The appraiser attempts to assess how the value of the target company will be affected by any changes to the operations or foundation of the company as a result of the proposed transaction, such as a loss of key customers or key managers.
The professional business appraiser should also examine the seller’s intangible assets when determining strategic value. The inventory of intangible assets includes such items as customer lists, intellectual property, patents, license and distributorship agreements, regulatory approvals, leasehold interests and employment contracts. Since certain intangibles may not be readily apparent, the more specifics the seller can supply, the more likely it is that they will enhance the valuation.

Notice how many of the assets which the startup business would rely upon (in the last paragraph above) are considered “intangible assets” and secondary or less important than anything else being counted in the appraisal. No wonder its so mucked up.

Books on business generally suggest that these “intangible assets” such as customer lists, databases of information used in the business, intellectual property owned by the business, regulatory approvals, supplier agreements, leasehold interests, employment contracts, specialized government incentives and similar items are not viewed as secondary but rather as primary assets of the startup business including its market distinction. Now, in reality – that is slap backwards to the way business appraisers and investment fund groups look at it.

The other thing I noted, is that in speaking to business investment groups in the past and from what I’ve seen online recently, they want to see a long-term planning for long-term growth and revenues but intend an exit strategy to be clearly available and perhaps, stated explicitly. Most business books and information about making business plans generally, do not include that last fact but rather impress upon the potential entrepreneur that they show how the business will work over the long-haul and how it will grow and prosper many years into the future.

– cricketdiane

***

Business valuation
From Wikipedia, the free encyclopedia

Business valuation is a process and a set of procedures used to estimate the economic value of an owner’s interest in a business. Valuation is used by financial market participants to determine the price they are willing to pay or receive to consummate a sale of a business. In addition to estimating the selling price of a business, the same valuation tools are often used by business appraisers to resolve disputes related to estate and gift taxation, divorce litigation, allocate business purchase price among business assets, establish a formula for estimating the value of partners’ ownership interest for buy-sell agreements, and many other business and legal purposes.

(etc. – but most of this is more interesting than useful for startup businesses.)

Standard and premise of value

Before the value of a business can be measured, the valuation assignment must specify the reason for and circumstances surrounding the business valuation. These are formally known as the business value standard and premise of value.[1] The standard of value is the hypothetical conditions under which the business will be valued. The premise of value relates to the assumptions, such as assuming that the business will continue forever in its current form (going concern), or that the value of the business lies in the proceeds from the sale of all of its assets minus the related debt (sum of the parts or assemblage of business assets).

Elements of business valuation

Economic conditions

A business valuation report generally begins with a description of national, regional and local economic conditions existing as of the valuation date, as well as the conditions of the industry in which the subject business operates. A common source of economic information for the first section of the business valuation report is the Federal Reserve Board’s Beige Book, published eight times a year by the Federal Reserve Bank. State governments and industry associations often publish useful statistics describing regional and industry conditions.

Financial Analysis

The financial statement analysis generally involves common size analysis, ratio analysis (liquidity, turnover, profitability, etc.), trend analysis and industry comparative analysis. This permits the valuation analyst to compare the subject company to other businesses in the same or similar industry, and to discover trends affecting the company and/or the industry over time. By comparing a company’s financial statements in different time periods, the valuation expert can view growth or decline in revenues or expenses, changes in capital structure, or other financial trends. How the subject company compares to the industry will help with the risk assessment and ultimately help determine the discount rate and the selection of market multiples.

Normalization of financial statements

The most common normalization adjustments fall into the following four categories:

* Comparability Adjustments. The valuer may adjust the subject company’s financial statements to facilitate a comparison between the subject company and other businesses in the same industry or geographic location. These adjustments are intended to eliminate differences between the way that published industry data is presented and the way that the subject company’s data is presented in its financial statements.

* Non-operating Adjustments. It is reasonable to assume that if a business were sold in a hypothetical sales transaction (which is the underlying premise of the fair market value standard), the seller would retain any assets which were not related to the production of earnings or price those non-operating assets separately. For this reason, non-operating assets (such as excess cash) are usually eliminated from the balance sheet.

* Non-recurring Adjustments. The subject company’s financial statements may be affected by events that are not expected to recur, such as the purchase or sale of assets, a lawsuit, or an unusually large revenue or expense. These non-recurring items are adjusted so that the financial statements will better reflect the management’s expectations of future performance.

* Discretionary Adjustments. The owners of private companies may be paid at variance from the market level of compensation that similar executives in the industry might command. In order to determine fair market value, the owner’s compensation, benefits, perquisites and distributions must be adjusted to industry standards. Similarly, the rent paid by the subject business for the use of property owned by the company’s owners individually may be scrutinized.

Income, Asset and Market Approaches

Three different approaches are commonly used in business valuation: the income approach, the asset-based approach, and the market approach[2]. Within each of these approaches, there are various techniques for determining the value of a business using the definition of value appropriate for the appraisal assignment. Generally, the income approaches determine value by calculating the net present value of the benefit stream generated by the business (discounted cash flow); the asset-based approaches determine value by adding the sum of the parts of the business (net asset value); and the market approaches determine value by comparing the subject company to other companies in the same industry, of the same size, and/or within the same region.

A number of business valuation models can be constructed that utilize various methods under the three business valuation approaches. Venture Capitalists and Private Equity professionals have long used the First chicago method which essentially combines the income approach with the market approach.

In determining which of these approaches to use, the valuation professional must exercise discretion. Each technique has advantages and drawbacks, which must be considered when applying those techniques to a particular subject company. Most treatises and court decisions encourage the valuator to consider more than one technique, which must be reconciled with each other to arrive at a value conclusion. A measure of common sense and a good grasp of mathematics is helpful.

Income approaches

The income approaches determine fair market value by multiplying the benefit stream generated by the subject or target company times a discount or capitalization rate. The discount or capitalization rate converts the stream of benefits into present value. There are several different income approaches, including capitalization of earnings or cash flows, discounted future cash flows (“DCF”), and the excess earnings method (which is a hybrid of asset and income approaches). Most of the income approaches look to the company’s adjusted historical financial data for a single period; only DCF requires data for multiple future periods. The discount or capitalization rate must be matched to the type of benefit stream to which it is applied. The result of a value calculation under the income approach is generally the fair market value of a controlling, marketable interest in the subject company, since the entire benefit stream of the subject company is most often valued, and the capitalization and discount rates are derived from statistics concerning public companies.

Discount or capitalization rates

A discount rate or capitalization rate is used to determine the present value of the expected returns of a business. The discount rate and capitalization rate are closely related to each other, but distinguishable. Generally speaking, the discount rate or capitalization rate may be defined as the yield necessary to attract investors to a particular investment, given the risks associated with that investment.

* In DCF valuations, the discount rate, often an estimate of the cost of capital for the business is used to calculate the net present value of a series of projected cash flows.

* On the other hand, a capitalization rate is applied in methods of business valuation that are based on business data for a single period of time. For example, in real estate valuations for properties that generate cash flows, a capitalization rate may be applied to the net operating income (NOI) (i.e., income before depreciation and interest expenses) of the property for the trailing twelve months.

There are several different methods of determining the appropriate discount rates. The discount rate is composed of two elements: (1) the risk-free rate, which is the return that an investor would expect from a secure, practically risk-free investment, such as a high quality government bond; plus (2) a risk premium that compensates an investor for the relative level of risk associated with a particular investment in excess of the risk-free rate. Most importantly, the selected discount or capitalization rate must be consistent with stream of benefits to which it is to be applied.

Capital Asset Pricing Model (“CAPM”)

The Capital Asset Pricing Model ( CAPM) is one method of determining the appropriate discount rate in business valuations. The CAPM method originated from the Nobel Prize winning studies of Harry Markowitz, James Tobin and William Sharpe. The CAPM method derives the discount rate by adding a risk premium to the risk-free rate. In this instance, however, the risk premium is derived by multiplying the equity risk premium times “beta,” which is a measure of stock price volatility. Beta is published by various sources for particular industries and companies. Beta is associated with the systematic risks of an investment.

One of the criticisms of the CAPM method is that beta is derived from the volatility of prices of publicly-traded companies, which are likely to differ from private companies in their capital structures, diversification of products and markets, access to credit markets, size, management depth, and many other respects. Where private companies can be shown to be sufficiently similar to public companies, however, the CAPM method may be appropriate.

Weighted Average Cost of Capital (“WACC”)

The weighted average cost of capital is an approach to determining a discount rate. The WACC method determines the subject company’s actual cost of capital by calculating the weighted average of the company’s cost of debt and cost of equity. The WACC must be applied to the subject company’s net cash flow to total invested capital.

One of the problems with this method is that the valuator may elect to calculate WACC according to the subject company’s existing capital structure, the average industry capital structure, or the optimal capital structure. Such discretion detracts from the objectivity of this approach, in the minds of some critics.

Indeed, since the WACC captures the risk of the subject business itself, the existing or contemplated capital structures, rather than industry averages, are the appropriate choices for business valuation.

Once the capitalization rate or discount rate is determined, it must be applied to an appropriate economic income stream: pretax cash flow, aftertax cash flow, pretax net income, after tax net income, excess earnings, projected cash flow, etc. The result of this formula is the indicated value before discounts. Before moving on to calculate discounts, however, the valuation professional must consider the indicated value under the asset and market approaches.

Careful matching of the discount rate to the appropriate measure of economic income is critical to the accuracy of the business valuation results. Net cash flow is a frequent choice in professionally conducted business appraisals. The rationale behind this choice is that this earnings basis corresponds to the equity discount rate derived from the Build-Up or CAPM models: the returns obtained from investments in publicly traded companies can easily be represented in terms of net cash flows. At the same time, the discount rates are generally also derived from the public capital markets data.

Build-Up Method

The Build-Up Method is a widely-recognized method of determining the after-tax net cash flow discount rate, which in turn yields the capitalization rate. The figures used in the Build-Up Method are derived from various sources. This method is called a “build-up” method because it is the sum of risks associated with various classes of assets. It is based on the principle that investors would require a greater return on classes of assets that are more risky. The first element of a Build-Up capitalization rate is the risk-free rate, which is the rate of return for long-term government bonds. Investors who buy large-cap equity stocks, which are inherently more risky than long-term government bonds, require a greater return, so the next element of the Build-Up method is the equity risk premium. In determining a company’s value, the long-horizon equity risk premium is used because the Company’s life is assumed to be infinite. The sum of the risk-free rate and the equity risk premium yields the long-term average market rate of return on large public company stocks.

By adding the first three elements of a Build-Up discount rate, we can determine the rate of return that investors would require on their investments in small public company stocks. These three elements of the Build-Up discount rate are known collectively as the “systematic risks.”

In addition to systematic risks, the discount rate must include “unsystematic risks,” which fall into two categories. One of those categories is the “industry risk premium.” Morningstar’s yearbooks contain empirical data to quantify the risks associated with various industries, grouped by SIC industry code.

The other category of unsystematic risk is referred to as “specific company risk.” Historically, no published data has been available to quantify specific company risks. However as of late 2006, new ground-breaking research has been able to quantify, or isolate, this risk for publicly-traded stocks through the use of Total Beta calculations. P. Butler and K. Pinkerton have outlined a procedure, known as the Butler Pinkerton Model (BPM), using a modified Capital Asset Pricing Model ( CAPM) to calculate the company specific risk premium. The model uses an equality between the standard CAPM which relies on the total beta on one side of the equation; and the firm’s beta, size premium and company specific risk premium on the other. The equality is then solved for the company specific risk premium as the only unknown. The BPM is a relatively new concept and is gaining acceptance in the business valuation community.

It is important to understand why this capitalization rate for small, privately-held companies is significantly higher than the return that an investor might expect to receive from other common types of investments, such as money market accounts, mutual funds, or even real estate. Those investments involve substantially lower levels of risk than an investment in a closely-held company. Depository accounts are insured by the federal government (up to certain limits); mutual funds are composed of publicly-traded stocks, for which risk can be substantially minimized through portfolio diversification.

Closely-held companies, on the other hand, frequently fail for a variety of reasons too numerous to name. Examples of the risk can be witnessed in the storefronts on every Main Street in America. There are no federal guarantees. The risk of investing in a private company cannot be reduced through diversification, and most businesses do not own the type of hard assets that can ensure capital appreciation over time. This is why investors demand a much higher return on their investment in closely-held businesses; such investments are inherently much more risky.

Asset-based approaches

The value of asset-based analysis of a business is equal to the sum of its parts. That is the theory underlying the asset-based approaches to business valuation. The asset approach to business valuation is based on the principle of substitution: no rational investor will pay more for the business assets than the cost of procuring assets of similar economic utility. In contrast to the income-based approaches, which require the valuation professional to make subjective judgments about capitalization or discount rates, the adjusted net book value method is relatively objective.

Pursuant to accounting convention, most assets are reported on the books of the subject company at their acquisition value, net of depreciation where applicable. These values must be adjusted to fair market value wherever possible. The value of a company’s intangible assets, such as goodwill, is generally impossible to determine apart from the company’s overall enterprise value. For this reason, the asset-based approach is not the most probative method of determining the value of going business concerns. In these cases, the asset-based approach yields a result that is probably lesser than the fair market value of the business. In considering an asset-based approach, the valuation professional must consider whether the shareholder whose interest is being valued would have any authority to access the value of the assets directly.

Shareholders own shares in a corporation, but not its assets, which are owned by the corporation. A controlling shareholder may have the authority to direct the corporation to sell all or part of the assets it owns and to distribute the proceeds to the shareholder(s). The non-controlling shareholder, however, lacks this authority and cannot access the value of the assets. As a result, the value of a corporation’s assets is rarely the most relevant indicator of value to a shareholder who cannot avail himself of that value. Adjusted net book value may be the most relevant standard of value where liquidation is imminent or ongoing; where a company earnings or cash flow are nominal, negative or worth less than its assets; or where net book value is standard in the industry in which the company operates. None of these situations applies to the Company which is the subject of this valuation report. However, the adjusted net book value may be used as a “sanity check” when compared to other methods of valuation, such as the income and market approaches.

Market approaches

The market approach to business valuation is rooted in the economic principle of competition: that in a free market the supply and demand forces will drive the price of business assets to a certain equilibrium. Buyers would not pay more for the business, and the sellers will not accept less, than the price of a comparable business enterprise. It is similar in many respects to the “comparable sales” method that is commonly used in real estate appraisal. The market price of the stocks of publicly traded companies engaged in the same or a similar line of business, whose shares are actively traded in a free and open market, can be a valid indicator of value when the transactions in which stocks are traded are sufficiently similar to permit meaningful comparison.

The difficulty lies in identifying public companies that are sufficiently comparable to the subject company for this purpose. Also, as for a private company, the equity is less liquid (in other words its stocks are less easy to buy or sell) than for a public company, its value is considered to be slightly lower than such a market-based valuation would give.

Guideline Public Company method

The Guideline Public Company method entails a comparison of the subject company to publicly traded companies. The comparison is generally based on published data regarding the public companies’ stock price and earnings, sales, or revenues, which is expressed as a fraction known as a “multiple.” If the guideline public companies are sufficiently similar to each other and the subject company to permit a meaningful comparison, then their multiples should be similar. The public companies identified for comparison purposes should be similar to the subject company in terms of industry, product lines, market, growth, margins and risk.

Guideline Transaction Method or Direct Market Data Method

Using this method, the valuation analyst may determine market multiples by reviewing published data regarding actual transactions involving either minority or controlling interests in either publicly traded or closely held companies. In judging whether a reasonable basis for comparison exists, the valuation analysis must consider: (1) the similarity of qualitative and quantitative investment and investor characteristics; (2) the extent to which reliable data is known about the transactions in which interests in the guideline companies were bought and sold; and (3) whether or not the price paid for the guideline companies was in an arms-length transaction, or a forced or distressed sale.Discounts and premiums

The valuation approaches yield the fair market value of the Company as a whole. In valuing a minority, non-controlling interest in a business, however, the valuation professional must consider the applicability of discounts that affect such interests. Discussions of discounts and premiums frequently begin with a review of the “levels of value.” There are three common levels of value: controlling interest, marketable minority, and non-marketable minority. The intermediate level, marketable minority interest, is lesser than the controlling interest level and higher than the non-marketable minority interest level. The marketable minority interest level represents the perceived value of equity interests that are freely traded without any restrictions.

These interests are generally traded on the New York Stock Exchange, AMEX, NASDAQ, and other exchanges where there is a ready market for equity securities. These values represent a minority interest in the subject companies – small blocks of stock that represent less than 50% of the company’s equity, and usually much less than 50%. Controlling interest level is the value that an investor would be willing to pay to acquire more than 50% of a company’s stock, thereby gaining the attendant prerogatives of control. Some of the prerogatives of control include: electing directors, hiring and firing the company’s management and determining their compensation; declaring dividends and distributions, determining the company’s strategy and line of business, and acquiring, selling or liquidating the business. This level of value generally contains a control premium over the intermediate level of value, which typically ranges from 25% to 50%. An additional premium may be paid by strategic investors who are motivated by synergistic motives. Non-marketable, minority level is the lowest level on the chart, representing the level at which non-controlling equity interests in private companies are generally valued or traded. This level of value is discounted because no ready market exists in which to purchase or sell interests.

Private companies are less “liquid” than publicly-traded companies, and transactions in private companies take longer and are more uncertain. Between the intermediate and lowest levels of the chart, there are restricted shares of publicly-traded companies. Despite a growing inclination of the IRS and Tax Courts to challenge valuation discounts , Shannon Pratt suggested in a scholarly presentation recently that valuation discounts are actually increasing as the differences between public and private companies is widening . Publicly-traded stocks have grown more liquid in the past decade due to rapid electronic trading, reduced commissions, and governmental deregulation. These developments have not improved the liquidity of interests in private companies, however. Valuation discounts are multiplicative, so they must be considered in order. Control premiums and their inverse, minority interest discounts, are considered before marketability discounts are applied.

Discount for lack of control

The first discount that must be considered is the discount for lack of control, which in this instance is also a minority interest discount. Minority interest discounts are the inverse of control premiums, to which the following mathematical relationship exists: MID = 1 – [1 / (1 + CP)] The most common source of data regarding control premiums is the Control Premium Study, published annually by Mergerstat since 1972. Mergerstat compiles data regarding publicly announced mergers, acquisitions and divestitures involving 10% or more of the equity interests in public companies, where the purchase price is $1 million or more and at least one of the parties to the transaction is a U.S. entity. Mergerstat defines the “control premium” as the percentage difference between the acquisition price and the share price of the freely-traded public shares five days prior to the announcement of the M&A transaction. While it is not without valid criticism, Mergerstat control premium data (and the minority interest discount derived therefrom) is widely accepted within the valuation profession.

Discount for lack of marketability

Another factor to be considered in valuing closely held companies is the marketability of an interest in such businesses. Marketability is defined as the ability to convert the business interest into cash quickly, with minimum transaction and administrative costs, and with a high degree of certainty as to the amount of net proceeds. There is usually a cost and a time lag associated with locating interested and capable buyers of interests in privately-held companies, because there is no established market of readily-available buyers and sellers. All other factors being equal, an interest in a publicly traded company is worth more because it is readily marketable. Conversely, an interest in a private-held company is worth less because no established market exists.

The IRS Valuation Guide for Income, Estate and Gift Taxes, Valuation Training for Appeals Officers acknowledges the relationship between value and marketability, stating: “Investors prefer an asset which is easy to sell, that is, liquid.” The discount for lack of control is separate and distinguishable from the discount for lack of marketability. It is the valuation professional’s task to quantify the lack of marketability of an interest in a privately-held company. Because, in this case, the subject interest is not a controlling interest in the Company, and the owner of that interest cannot compel liquidation to convert the subject interest to cash quickly, and no established market exists on which that interest could be sold, the discount for lack of marketability is appropriate. Several empirical studies have been published that attempt to quantify the discount for lack of marketability. These studies include the restricted stock studies and the pre-IPO studies. The aggregate of these studies indicate average discounts of 35% and 50%, respectively. Some experts believe the Lack of Control and Marketability discounts can aggregate discounts for as much as ninety percent of a Company’s fair market value, specifically with family owned companies.

Restricted stock studies

Restricted stocks are equity securities of public companies that are similar in all respects to the freely traded stocks of those companies except that they carry a restriction that prevents them from being traded on the open market for a certain period of time, which is usually one year (two years prior to 1990). This restriction from active trading, which amounts to a lack of marketability, is the only distinction between the restricted stock and its freely-traded counterpart. Restricted stock can be traded in private transactions and usually do so at a discount. The restricted stock studies attempt to verify the difference in price at which the restricted shares trade versus the price at which the same unrestricted securities trade in the open market as of the same date. The underlying data by which these studies arrived at their conclusions has not been made public. Consequently, it is not possible when valuing a particular company to compare the characteristics of that company to the study data. Still, the existence of a marketability discount has been recognized by valuation professionals and the Courts, and the restricted stock studies are frequently cited as empirical evidence. Notably, the lowest average discount reported by these studies was 26% and the highest average discount was 45%.

Option pricing

In addition to the restricted stock studies, U.S. publicly traded companies are able to sell stock to offshore investors (SEC Regulation S, enacted in 1990) without registering the shares with the Securities and Exchange Commission. The offshore buyers may resell these shares in the United States, still without having to register the shares, after holding them for just 40 days. Typically, these shares are sold for 20% to 30% below the publicly traded share price. Some of these transactions have been reported with discounts of more than 30%, resulting from the lack of marketability. These discounts are similar to the marketability discounts inferred from the restricted and pre-IPO studies, despite the holding period being just 40 days. Studies based on the prices paid for options have also confirmed similar discounts. If one holds restricted stock and purchases an option to sell that stock at the market price (a put), the holder has, in effect, purchased marketability for the shares. The price of the put is equal to the marketability discount. The range of marketability discounts derived by this study was 32% to 49%.

Pre-IPO studies
Another approach to measure the marketability discount is to compare the prices of stock offered in initial public offerings (IPOs) to transactions in the same company’s stocks prior to the IPO. Companies that are going public are required to disclose all transactions in their stocks for a period of three years prior to the IPO. The pre-IPO studies are the leading alternative to the restricted stock stocks in quantifying the marketability discount. The pre-IPO studies are sometimes criticized because the sample size is relatively small, the pre-IPO transactions may not be arm’s length, and the financial structure and product lines of the studied companies may have changed during the three year pre-IPO window.

Applying the studies

The studies confirm what the marketplace knows intuitively: Investors covet liquidity and loathe obstacles that impair liquidity. Prudent investors buy illiquid investments only when there is a sufficient discount in the price to increase the rate of return to a level which brings risk-reward back into balance. The referenced studies establish a reasonable range of valuation discounts from the mid-30%s to the low 50%s. The more recent studies appeared to yield a more conservative range of discounts than older studies, which may have suffered from smaller sample sizes. Another method of quantifying the lack of marketability discount is the Quantifying Marketability Discounts Model (QMDM).

Estimates of Business Value

The evidence on the market value of specific businesses varies widely, largely depending on reported market transactions in the equity of the firm. A fraction of businesses are publicly traded, meaning that their equity can be purchased and sold by investors in stock markets available to the general public. Publicly-traded companies on major stock markets have an easily-calculated market capitalization that is a direct estimate of the market value of the firm’s equity. Some publicly-traded firms have relatively few recorded trades (including many firms traded over the counter or in pink sheets ). A far larger number of firms are privately held. Normally, equity interests in these firms (which include corporations, partnerships, limited-liability companies, and some other organizational forms) are traded privately, and often irregularly.

A number of stock market indicators in the United States and other countries provide an indication of the market value of publicly-traded firms. The Survey of Consumer Finance in the US also includes an estimate of household ownership of stocks, including indirect ownership through mutual funds.[3] The 2004 and 2007 SCF indicate a growing trend in stock ownership, with 51% of households indicating a direct or indirect ownership of stocks, with the majority of those respondents indicating indirect ownership through mutual funds. Few indications are available on the value of privately-held firms. Anderson (2009) recently estimated the market value of U.S. privately-held and publicly-traded firms, using Internal Revenue Service and SCF data.[4] He estimates that privately-held firms produced more income for investors, and had more value than publicly-held firms, in 2004.

* Financial Accounting Standards Board (FASB) (publishes financial accounting and reporting guidelines which are relevant to business valuation)
* AICPA’s Statement on Standards for Valuation Services (SSVS)
* American Society of Appraisers (both CPA and non-CPA business appraisers)
* The Canadian Institute of Chartered Business Valuators (CICBV) (The largest professional valuation organization in Canada and sole administrators of the Chartered Business Valuator (CBV) designation training program and accreditation testing)
* National Association of Certified Valuation Analysts (NACVA)
* Institute of Business Appraisers (IBA)
* International Association of CPAs, Attorneys, and Management (IACAM) (Free Business Valuation E-Book Guidebook)

Initial public offering (IPO) A Secondary Market Offering (SEO) A Follow-on offering A Rights issue A Private placement A Spin off A Spin out A Equity carve-out A Greenshoe (Reverse) A Book building A Bookrunner A Underwriter
Mergers and
acquisitions

Takeover A Reverse takeover A Tender offer A Proxy fight A Poison pill A Freeze-out merger A Tag-along right A Drag-along right A Pre-emption right A Control premium A Due diligence A Divestment A Sell side A Buy side A Demerger
Leverage

Leveraged buyout A Leveraged recap A Financial sponsor A Private equity A Bond offering A High-yield debt A DIP financing A Project finance
Valuation
Financial modeling A Free cash flow A Business valuation A Fairness opinion A Stock valuation A Boyd Model A APV A DCF A Net present value (NPV) A Cost of capital (Weighted average) A Comparable company analysis A Enterprise value A Tax shield A Minority interest A Associate company A EVA A MVA A Terminal value A Real options analysis
List of investment banks A List of finance topics

Another thing that I’ve noticed that has changed in business and investment thinking that does not appear in most books about business, is that while passion about one’s concepts and business and ideas and plans is considered necessary and desirable by potential investors and business resources, to create anything in business is to create something that will be sold off, dismantled possibly, destroyed possibly, taken over possibly, and ostensibly considered assets for a raider to consume for their own benefits. The business books don’t say that but it is necessary to be passionate, yet someway removed from the short-sightedness of that passion with the attachment it would have to a business built by one’s own hands and dreams.

– cricketdiane

***

Business incubator
From Wikipedia, the free encyclopedia

Business incubators are programs designed to accelerate the successful development of entrepreneurial companies through an array of business support resources and services, developed and orchestrated by incubator management and offered both in the incubator and through its network of contacts. Incubators vary in the way they deliver their services, in their organizational structure, and in the types of clients they serve. Successful completion of a business incubation program increases the likelihood that a start-up company will stay in business for the long term: Historically, 87% of incubator graduates stay in business.[1]

Incubators differ from research and technology parks in their dedication to start-up and early-stage companies. Research and technology parks, on the other hand, tend to be large-scale projects that house everything from corporate, government or university labs to very small companies. Most research and technology parks do not offer business assistance services, which are the hallmark of a business incubation program. However, many research and technology parks house incubation programs.

Incubators also differ from the U.S. Small Business Administration’s Small Business Development Centers (and similar business support programs) in that they serve only selected clients. SBDCs are required by law to offer general business assistance to any company that contacts them for help. In addition, SBDCs do not target start-up and early-stage companies; they work with any small business at any stage of development. Many business incubation programs partner with their local SBDC to create a one-stop shop for entrepreneurial support.

In 2005 alone, North American incubation programs assisted more than 27,000 companies that provided employment for more than 100,000 workers and generated annual revenues of $17 billion.[2]Contents

Unlike many business assistance programs, business incubators do not serve any and all companies. Entrepreneurs who wish to enter a business incubation program must apply for admission. Acceptance criteria vary from program to program, but in general only those with feasible business ideas and a workable business plan are admitted. It is this factor that makes it difficult to compare the success rates of incubated companies against general business survival statistics.[4]

Although most incubators offer their clients office space and shared administrative services, the heart of a true business incubation program is the services it provides to start-up companies.

More than half of incubation programs surveyed by the National Business Incubation Association in 2006 reported that they also served affiliate or virtual clients.[5] These companies do not reside in the incubator facility. Affiliate clients may be home-based businesses or early-stage companies that have their own premises but can benefit from incubator services. Virtual clients may be too remote from an incubation facility to participate on site, and so receive counseling and other assistance electronically.

The amount of time a company spends in an incubation program can vary widely depending on a number of factors, including the type of business and the entrepreneur’s level of business expertise. Life science and other firms with long research and development cycles require more time in an incubation program than manufacturing or service companies that can immediately produce and bring a product or service to market. On average, incubator clients spend 33 months in a program.[5] Many incubation programs set graduation requirements by development benchmarks, such as company revenues or staffing levels, rather than time in the program.

More than half of all business incubation programs are mixed-use projects; that is, they work with clients from a variety of industries. Technology incubators account for 39% of incubation programs.[5]

Business incubation has been identified as a means of meeting a variety of economic and socioeconomic policy needs, which may include
• Creating jobs and wealth
• Fostering a community’s entrepreneurial climate
• Technology commercialization
• Diversifying local economies
• Building or accelerating growth of local industry clusters
• Business creation and retention
• Encouraging women or minority entrepreneurship
• Identifying potential spin-in or spin-out business opportunities
• Community revitalization[6]

About one-third of business incubation programs are sponsored by economic development organizations. Government entities (such as cities or counties) account for 21% of program sponsors. Another 20% are sponsored by academic institutions, including two- and four-year colleges, universities, and technical colleges.[5]

In many countries, incubation programs are funded by regional or national governments as part of an overall economic development strategy. In the United States, however, most incubation programs are independent, community-based and resourced projects. The U.S. Economic Development Administration is a frequent source of funds for developing incubation programs, but once a program is open and operational it typically receives no federal funding; few states offer centralized incubator funding. Rents and/or client fees account for 59% of incubator revenues, followed by service contracts or grants (18%) and cash operating subsidies (15%).[5]

Many for-profit or private incubation programs were launched in the late 1990s by investors and other for-profit seeking to hatch businesses quickly and bring in big payoffs. At the time, NBIA estimated that nearly 30% of all incubation programs were for-profit ventures. In the wake of the dot-com bust, however, many of those programs closed. In NBIA’s 2002 State of the Business Incubation survey, only 16% of responding incubators were for-profit programs. By the 2006 SOI, just 6% of respondents were for-profit.[5]

Although some incubation programs (regardless of nonprofit or for-profit status) take equity in client companies, most do not. Only 25% of incubation programs report that they take equity in some or all of their clients.[5]

History

The formal concept of business incubation began in the USA in 1959 when Joseph Mancuso opened the Batavia Industrial Center in a Batavia, New York, warehouse[7]. Incubation expanded in the U.S. in the 1980s and spread to the UK and Europe through various related forms (e.g. innovation centres, pépinières d’entreprises, technopoles/science parks).

The U.S.-based National Business Incubation Association estimates that there are about 5,000 incubators worldwide. As of October 2006, there were more than 1,400 incubators in North America, up from only 12 in 1980.

Her Majesty’s Treasury identified around 25 incubation environments in the UK in 1997; by 2005, UKBI identified around 270 incubation environments across the country. A study funded by the European Commission in 2002 identified around 900 incubation environments in Western Europe.[8]

Incubation activity has not been limited to developed countries; incubation environments are now being implemented in developing countries and raising interest for financial support from organisations such as UNIDO and the World Bank.

My Note –
The average time for a business to be involved with a business incubator program is 33 months. I forgot where I read that a couple days ago but it is likely an average that suggests some businesses quickly grow past the need for it and some continue using those services for 3 years or more – for whatever reason, maybe to grow with a better foundation going forward.

– cricketdiane

***

The Atlanta’s ATDC Startup Showcase set for May 24
May 13th, 2010

TechSquare sign

The ATDC is located in the Research Building at Atlanta’s Technology Square

The Advanced Technology Development Center (ATDC) is a start-up accelerator that helps Georgia technology entrepreneurs launch and build successful companies. Founded in 1980, ATDC has helped create millions of dollars in tax revenues by graduating more than 120 companies, which together have raised more than a billion dollars in outside financing. ATDC has provided business incubation and acceleration services to thousands of Georgians.

Recently ATDC expanded its mission by merging with Georgia Tech’s VentureLab and with the Georgia SBIR Assistance Program. This change has enabled ATDC to greatly extend its reach to serve more technology companies along multiple growth paths and at all stages of development. ATDC has opened its membership to all technology entrepreneurs in Georgia, from those at the earliest conception stage to the well-established, venture-fundable companies.

ATDC is part of the Enterprise Innovation Institute (EI2) at Georgia Tech, which helps Georgia enterprises improve their competitiveness through the application of science, technology and innovation. ATDC currently has three facilities; two at Georgia Tech’s main campus in Atlanta, and one at Georgia Tech’s satellite campus in Savannah.

Did you ever have a great potential customer/investor presentation, but no deal closed? Why no deal? Well, usually the customer is unable to repeat your perfect message to other needed decision makers. Your message gets garbled. Since few people buy alone, they must repeat your message to others for you to close. Get the group to say yes. We will create your Leave Behind and show you how to teach customers to close themselves, repeating exactly what you want. You will be an expert at using the four components of the leave behind. Using your Leave Behind, customers will become your prophets, making you profits. You will close the majority of your customer encounters.

Mark Grace is an active StartupLounge supporter, entrepreneur and active investor. His current focus is on VisualTalking, a leading community portal that allow members to replace their text-based communication with a pictographic system that users themselves create. VisualTalking has nearly a million users.

How COI assists Georgia businesses and entrepreneurs in innovative industries…
Georgia’s Centers of Innovation provides unique, technology-oriented support to businesses and start-ups in the areas of aerospace, agribusiness, energy, life sciences, logistics and advanced manufacturing. Each of the six centers provides direct access to university and technical college applied research, commercialization resources, technology connections, matching grant funds, potential investor networks and key government agencies. Client companies are connected with industry-specific experts who are on the leading edge of technology and new ideas. A common goal across all of the centers is to cut red tape, streamline connections and seek technology solutions to industry-led challenges; within this framework the Centers create a pro-growth, innovative business environment for industries critical to Georgia’s expansion.

The Georgia Innovation group above is likely similar to those found in every state and in many regional centers. However, most universities and research groups have liaison offices onsite as well where technology and research from the university can be accessed through franchise and royalties / licensing contracts. They have liaison officers that will help and resources for the business owner, entrepreneur and inventor that wants to include some of that research or development made at the university – in their business or patent.

Usually I find these technology liaison offices by going to the University website and using the search form (or looking for links to) the words technology liaison or technology licensing. Sometimes each department has its own office and often, there is an office for the entire university’s assets in research and development, etc.

– cricketdiane

***

Angel Investor Directory
Jun 13, 2005

Inc. Newsletter

Small Business Success

Inspiring company profiles and best practices for smart business owners

Finding the right angel investor could help you get your start-up off the ground. Angel-investor networks are a good place to start looking for funding. These national and local groups of angels meet — formally or informally — to discuss deals and learn about the best new business opportunities.

When you’re in search of financing, the idea of an angel — an individual investor with money to invest in early-stage or start-up companies — can seem nothing short of enchanting. But where do you find an angel? This guide will help you start your search.
By Inc. Staff | Feb 1, 2006

Funding for entrepreneurial businesses has completely dried up, right? Wrong. Angel investors — long a tried-and-true source of capital for young businesses — have not hung up their wings.
By Paul B. Brown | Oct 1, 2001

So you can’t blame some investors and entrepreneurs for thinking that now is the worst of all possible times to get start-up financing. They say owners of new companies can no longer go to venture-capital firms for a quick financial fix. Nor, the pessimists add, can entrepreneurs rely on angel investors, wealthy individuals who seek businesses to invest in and mentor.

While some of the pessimism is warranted, much is due to confusion over the relative roles that VCs and angels play in financing companies. Contrary to common wisdom, the two groups are not interchangeable. Angels, who are often cashed-out entrepreneurs, invest money of their own, typically the $250,000 to $500,000 that companies need to get off the ground. VCs, by contrast, invest mostly institutional funds, and they typically come on board later in a company’s life, supplying the $1 million or more needed to keep both early-stage and midstage companies going.

(etc. – a lot of good information in this article from 2001 that is still very valid and appropriate, my note – cricketdiane)

Atlanta Technology Angels
Early stage capital and support for Georgia startups

The Cold Reality of First-Time Funding
DateFriday, May 28, 2010 at 10:41AM

The post below is by Giff Constable, a veteran of half a dozen startups, and it’s the best advice I’ve seen in a long time for entrepreneurs looking for angel investors. It’s worth reading before beginning the unpredictable odyssey of applying to angel groups for funding.

( . . . )

Too many people think they can raise money on an idea, a powerpoint deck, or even a mere prototype. From what I see, that is the exception, not the norm, regardless of chatter about a lot of seed money swirling around.

An idea and vision is necessary but not enough. Maniacal zeal is necessary but not enough. A smart, clued-in team is necessary but not enough. A first version of the product is necessary but not enough. You are competing against other funding-hopeful startups that have achieved all that PLUS initial traction PLUS a fit with the investor’s sweet spot.

NBAI is a community of investors that want to actively pursue business opportunities that may involve the investment of time, money, or other resources. Traditionally, we have focused on private equity and funding transactions. The organization has evolved to include special interest groups that have socio-economic influence, short term liquidity requirements, or acquisition and participation elements. Investors are invited to attend the NBAI Investor Meetings, a premier invitation-only meeting for early stage venture capital, angel investors, executives of early stage, early stage capital, accredited angel investors, angel investor networks, capital investors, angel groups, small business investors, and emerging growth companies, investment bankers, executives, successful entrepreneurs, premier service providers and industry leaders.

(etc.)

Our investor community expands…
We are excited to be the most active angel investor group in the Southeast. Over 100 investors have attended our events in the last year. The NBAI investor community has invested over $34M since 1994. Three Companies have received funding from our NBAI investors this year.

All pre-registered attendees will receive sneak peak at the investor profiles so you may review in advance. Up to 6 screened early stage or emerging growth companies are showcased at the NBAI Private Equity Investor Forum. A variety of industries: technology, software, bio-med, services, and consumer goods.

During the thirteen years our investors have participated in over 60 transactions valued at over $34 million, with individual investments ranging from $10K to $3 million. (from 1994 to 2010 inclusively, my note.)

The Atlanta Technology Angels (known as ATA) is a formal angel investment group founded in 1998. It is comprised of 50+ private individuals who are active angel investors. ATA’s investments are focused on early stage, Georgia based, technology companies that are focused on large markets. 90% of the companies funded by ATA receive local or outside venture capital funding within 12-18 months of angel funding.

The group has funded 40+ technology companies since 1999 and currently has 24 active portfolio companies. ATA, as a group, has invested $25,000,000+ into these 40+ companies and these same companies have gone on to raise over $300,000,000 in venture capital funding from 21 venture capital funds in 18 states. The vast majority of the members of ATA are active investors and often mentor entrepreneurs within ATA portfolio companies. Recent positive exits include Invirtus and Spi Dynamics. ATA formally reviews two companies 10 months out of the year. ATA has completed one funding in 2008, is closing another in March and is actively engaged in additional financings.

(also)

ATDC Seed Fund

State funded. Often co-invests with angel investors. $3 to $1 match provision ($3 private capital to each $1 state funds) Run by Charles Ross within ATDC. This one is getting active and is one to keep an eye on. Has plenty of capital. Remember, tho, that the match is a must for any investment. So to get ATDC in, you must have private capital.

Active Capital The SBA (Small Business Administration) created the Angel Capital Electronic Network (ACE-Net). ACE-Net has become Active Capital. The entrepreneur pays $199 to use the online program to generate a U-7 SCOR Offering. This offering is listed at the Active Capital site for 60 days. The member investors are notified of the company if it matches their criteria. Additional time periods of 90 day increments can be bought for $100. Investors join by verifying they are ‘accredited’ and pay a fee of no more than $450.00 per year. Some states pay the fees for the investors.

Angel Capital Network very little is available on the website as to fees, how the service works, and what the qualifications are to join.

Angel Deals Entrepreneurs pay $19.95 per year for their listing and a variety of materials. Investors pay $50.00 per year. There is a search function but no ‘matching’ function.

(info found here also – the above listing was from a different site that I will list below along with other info found there)

ACE-Net, The Angel Capital Electronic Network

Title:

ACE-Net, The Angel Capital Electronic Network

AgencyName:

Small Business Administration

MajorOrganizationalSubdivision:

Office of Communications and Public Liaison

MinorOrganizationalSubdivision:

None Selected

Unit:

Office of Marketing and Customer Service

Abstract:

This brochure describes ACE-Net, an Internet-based securities listing service that benefits entrepreneurs, accredited investors, accountants, and securities advisors. ACE-Net transforms the informal angel investment community into a nationwide system for entrepreneurs and investors to meet.

Purpose:

The purpose of this product is to provide information on ACE-Net to entrepreneurs and angel investors, as well as accountants and securities attorneys.

AgencyProgram:

N/A

DistributorName:

SBA Answer Desk

DistributorOrganization:

Small Business Administration

DistributorStreetAddresss:

409 3rd Street, S.W.

DistributorCity:

Washington

DistributorState:

DC

DistributorZip:

20416

DistributorCountry:

USA

DistributorHoursOfService:

8:30 a.m. – 5:00 p.m.

DistributorTelephone:

1-800-827-5722

DistributorOrderProcess:

This publication is available free of charge by contacting the SBA Answer Desk at the above telephone number.

ACE-Net: A Tough Way to Find an Angel
This SBA Web site can connect you with backers, but you have to work at it

( . . . )

To help educate entrepreneurs on the whole process, the SBA has set up 21 “regional operators” around the country, most of which are public/private partnerships for encouraging business development. Companies interact with the system through the regional operators, who issue passwords, advise on registration, and check paperwork for errors. Some states that are particularly eager to nurture new enterprises will even waive the $495 registration fee.

KCET’s Day says ACE-Net is working to improve its shortcomings: “Because it’s an SBA project, it does have more bureaucracy than if it was done by a private company. But they are doing as much as they can to make it a streamlined process.” Still, raising money is almost always a time-consuming, diabolically detailed job. Many entrepreneurs may find ACE-Net’s red tape too nettlesome. But as most soon find out, angels with real money rarely go into a relationship blind.

Below is a listing of angel groups that are members in good standing of the Angel Capital Association, as well as organizations that are affiliated with ACA.

The directory includes a link to the Web site of each organization so you may learn more about the group, including investment preferences and processes. Click on the group name to link to the corresponding Web site.

Entrepreneurs in the process of searching for funding sources may also find valuable information resources specifically for entrepreneurs on the Angel Capital Education Foundation Web site, including a longer set of links to angel groups.

(my note – includes quite a list of angel investors and links to them.)

When it comes to U.S. job growth, startup companies aren’t everything – they are the only thing A study released by the Ewing Marion Kauffman Foundation shows that all net job growth occurs in the U.S. economy only through startup firms. Now if only we could get policy makers to read the study.

New Resource for Entrepreneurs Advancing Energy Innovation

The Kauffman Foundation has launched a new initiative for advancing promising new ventures in energy. If you have an interest in energy as an entrepreneur, investor, buyer, agency or advocate, click over and add your voice to the growing choir of those working to kick our energy addiction.

Entrepreneurs have led the U.S. out of every recession of the last 100 years. To learn how, consider these relevant stories.

(one of several published articles available on the site link below the entry – )

Angel Financing: Do’s and Don’ts for Entrepreneurs

* Author: Andy Sack

Summary: Any entrepreneur who hopes to raise capital from individual investors, so-called angels, should be properly prepared with a presentation, business plan, list of potential angels, and outline of the opportunity his or her new venture affords. The author explains that it’s also important to avoid making such mistakes as allowing investors to have too large a stake in the enterprise. That could cause problems should the company fail, he writes, in an article filled with specific tips for dealing with these financiers.

For starters, I’ll restate the assertion. Most VC’s don’t sign non-disclosure agreements. Guy Kawasaki had a good comment on it in his Venture Capitalist Wishlist post.

“Before you even start addressing the hard stuff, never ask a venture capitalist to sign a non-disclosure agreement (NDA). They never do. This is because at any given moment, they are looking at three or four similar deals. They’re not about to create legal issues because they sign a NDA and then fund another, similar company–thereby making the paranoid entrepreneur believe the venture capitalist stole his idea. If you even ask them to sign one, you might as well tattoo “I’m clueless!” on your forehead.”

That basically says it all. I’d add a few things:

1. Even if I was inclined to sign an NDA, I’d have to go through the process of reading it and deciding if it had any problems (many of them do – they are usually overreaching for the information being disclosed), dealing with my lawyer to change it, and you dealing with (and spending time with your lawyer) to accept or reject my requests. In some cases, I’d probably spend more time dealing with the NDA then with the entrepreneur and his idea.

(etc. – good info to read about non-disclosure agreements and angel investors, venture capitalists, and other investment pools – likely applies to large companies interacting with independent inventors and small business owners as well, my note – cricketdiane)

(continuing is this excerpt from the article – )

As an entrepreneur, don’t think of this as “arrogance”, think of it as “practicality.” Your friend the VC is actually trying to save you time and money. If you think you have something super secret that no one else should know, just don’t tell me about it. Oh – and check your assumption in that case – especially since the value is in creating the thing, not simply having the idea.

by Nivi on November 8th, 2007
Summary: Don’t send long business plans to investors. Don’t ask for NDAs. Don’t share information that must remain confidential. Understand that investors care about traction over everything else.

Don’t send a 50-page business plan to investors. Nobody reads them and nobody executes them. Investors who want a long plan look bad—so do companies that generate them.

The milestones slide of your deck summarizes the company’s plan for the next 1-3 quarters. Document your detailed plans on a napkin, wiki, spreadsheet, deck, to-do list, or whatever. Share it with investors sometime around your second meeting and make sure they generally agree with your plan.

But don’t send investors a 50-page sales pitch that you call a business plan—an elevator pitch and deck are sufficient. You don’t need an executive summary either—an elevator pitch and deck are sufficient.
Don’t ask for an NDA.

“Because of the large number of business plans… that we review, and the similarity of many such plans… we cannot accept responsibility for protecting against misuse or disclosure of any confidential or proprietary information…”

— Sequoia Capital

Getting an NDA from professional investors is almost impossible. It can happen, but you shouldn’t bother.

Investors don’t sign NDAs because they don’t want to get sued over them. Competing companies tend to get started at the same time because the market timing is right. Investors don’t want you to sue them if they fund your competitor—so they don’t sign NDAs.

(etc. – lots of good info – well worth reading and following the links to the other info available through this site, my note)

(also)

And if you must keep something absolutely confidential, don’t email it to investors and don’t mention it in person. Investors often look at several similar companies at once. Your plans probably won’t get to your competitors, but you should assume they will.

(and)

Smart investors know that they’re often wrong and look for traction over everything else.

Summary: An introduction and elevator pitch are critical to getting a meeting. You can also provide a “ten-slide” deck that tells a compelling story about your team, product, traction, and plans.

Include a “ten-slide” deck with your elevator pitch.

The best deck template in the universe is David Cowan’s How To Not Write A Business Plan—use it. There are other templates from excellent sources on the Web, but this is the best.

Read David Cowan’s article and apply these headings and minor changes:

1. Cover.
2. Mission.
3. Summary. Summarize the key, compelling facts of the company. You can steal the content from your elevator pitch.
4. Team. Highlight the past accomplishments of the team; if your team has been successful before, investors may believe it will be successful again. Don’t include positions you intend to fill—save that for the Milestones slide. Put yourself last: it seems humble and lets you tell a story about how your career has led to the discovery of the…
5. Problem.
6. Solution. Include a demo such as a screencast, a link to working software, or pictures. God help you if you have nothing to show.
7. Technology.
8. Marketing. Include market size estimates here or in the Problem. If you haven’t launched, discuss your plan to acquire users or customers.
9. Sales. If you don’t have sales, discuss your business model and prospective customers. Ignore the cost of customer acquisition unless you have some insight into the issue.
10. Competition. Describe why users or customers use your product instead of the competition’s product. Describe any competitive advantages that remain after the competition decides to copy you exactly.
11. Milestones. Don’t build a detailed financial model if you don’t have past earnings, a significant financial history, or insight into the issue. Instead, include your current status and milestones for the next 1-3 quarters for product, team, marketing, sales, and quarterly and cumulative burn.
12. Conclusion. This slide can be inspirational, a larger vision of what the company could do if these current plans are realized, or a rehash of the Summary slide.
13. Financing. Dates, amounts, and sources of money raised. How much money are you raising in this round?

These slides tell a story.

This sequence of slides tells a story:

We have a mission and a team that is taking us there. Why? We discovered a large problem and solved it with a product that has this amazing technology inside. We’re going to market and sell it to these customers, with these advantages over our competitors. In particular, we’re working towards these milestones over the next few quarters. In conclusion, this financing is a great investment opportunity.

Put pictures in the slides and text in the notes.

Keep the slides simple, visual, and minimal, with 30 point or larger font. The slides will look great when you present –
Put talking points, reasoning, and prose in the notes that accompany each slide. Don’t try to cram cogent arguments into bullet points on the slides; see The Cognitive Style of PowerPoint –

Email a PDF that combines each slide and its notes on a single page; slide on top, notes on bottom –
You now have a single file for emails and live presentations. An investor can read the slides and notes together and imagine a presentation.

(Definitely see the page at the link above – it has a more defined step-by-step process that is clear and easy to follow also on down into the copy and some interesting tidbits among the comments after the article near the bottom of the page – my note)